Being a young promising area, the crypto world along with the potential profits also brings risks. Uncertainty and volatility are typical of cryptomarket, that is why together with technical analysis and special trader’s psychology money and risk management matter a lot. So, you noticed a great trade, earned, then try to save it and even better to multiply!
There are a variety of rules and suggestions regarding this issue, which are usually combined in different strategies and customized for a particular trader. No fixed list of rules: Freedom environment which is a gift and the problem of choice at the same time. In this article, we briefly review some general strategies to tackle market risks, and it will be up to you to combine and advance them.
Avoid greed
One of the most harmful feelings in your mind during trading is greed. Just remember what you think when the price rises after you opened a long position. It really requires lots of effort to close the position, as you are wishing more profit flowing into your wallet, admiring growing trading volumes and amazing news about this particular cryptocurrency which is so promising and will grow forever. Here it is necessary to take off the blinders and understand that eventually, the price stops. Be it a gradual decrease or a dump, probably technical problems on the exchange, if you are a trader (not a long-term investor), you should fix your profit not waiting for the reversal trend. The exit point should be identified in advance (read about floating exit points and their potential harm here), basing on the previous coin dynamics, your ambitions, strategy, trading volumes, social media mentionings, the reaction of whales (huge market players) and many more, not enabling the greed to manage your actions. Note that sometimes it’s better to stop for a while and not to trade!
Fix profit by parts
The top level of the price (or bottom in case of short) is very appealing, but keep in mind that it is seen on the chart only after the price passes it already, while during an uptrend, for example, it can be hardly ever noticed. That is why a wise idea to benefit from the price movement is to grab profits by parts on the way to the top or bottom. If you do not have enough time to monitor the price you can set the orders one by one on the way to the rally. Here is a useful trick: Consider support and resistance lines, and set take profit orders below support (long) and above resistance (short). The amount of the part depends on your strategy and aims. The only advice is not to close the position on the way to top/bottom. Leave a part of the initial sum (like 10% of it), as you never know if there is a jackpot after.
Interestingly, even with the rules set, some people fail to coply with them that often acts as a reaon for losses. The problem is that trading is also about psychology. Thus, it’s important to understand the psycho basics that compose a successful trader mind. Read here about how our psychology influences our trading performance.
Do not put all your eggs in one basket
One more key concept is the diversification of the portfolio and calculation of its amount. Actually, it is a wide and fascinating point to discuss, and only the core points of it are regarded in this article.
It does not matter how promising one or another asset seems to you, try to focus on a range of opportunities, as in the crypto world something can suddenly go wrong (as anything in life). Just imagine that all the hype and price growth is ruined by one negative piece of news or was created artificially! Or, for instance, the decision of a huge market player which has a tangible impact on the price fluctuations. Never go for broke!
The wisely composed portfolio implies several types of assets of different industries and risks. The number of assets has almost the only limitation which is the number of positions you are able to manage, as even profitable coins should be monitored and controlled. Otherwise, it is not as effective as it could be, but we definitely need maximum effectiveness. What is more, no control means stress, which is not what successful trading implies.
No doubt, these features are up to your aims and overall strategy, however, to minimize risks, it is better to use up to 10% on each asset. In case of your firm confidence in the asset let it be more, but remember that all the rising tendencies finally finish. Therefore, having one outstanding asset should be better supplemented by finding more new opportunities to switch the attention to.
Below you can see a balanced portfolio example with various assets included. By the way, the detailed balance is calculated in statistics module in Bitinsure and presents your portfolio in a visual way.
Be forward-looking: Reinvest, invest, convert
It is one of the most effective ways to use your gains to multiply it. There are several options to use it, some of which are the following:
- 30% reinvest in new prospective altcoins,
- 25% enlarge the most profitable positions you have currently,
- 25% invest in other assets,
- 20% convert into fiat.
Pay attention to the last two points, as they are acting as a preparation for “hard times” in crypto. Of course, it may be difficult to resist the temptation of investing all into new coins, but thinking a few moves ahead a trader uses the profit in several ways, being prepared for any scenario.
And how do you manage risks in crypto?
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